Work Problem in Excel spreadsheet Part 1 A firm has the current liabilities and
ID: 2474743 • Letter: W
Question
Work Problem in Excel spreadsheet
Part 1
A firm has the current liabilities and equity financing on its balance sheet. The firm has taxable income that puts it in a 38% federal tax bracket, and the state in which it operates levies a 6.5% income tax. Compute the firm’s weighted average cost of capital.
Source Amount Interest/RoR Proportion
Short-term loan $ 5,000,000 7.5% 0.05
Long-term loan $20,000,000 5.8% 0.25
Retained Earnings $25,000,000 17.0% 0.20
Common stock $50,000,000 22.0% 0.50
Part 2
The same firm is considering the following projects to improve its production process. If the firm has a capital budget of $1,400,000, which projects should be accepted by the rate of return criteria? What is the firm’s opportunity cost of capital?
Project
First Cost
Annual Benefit
Life (years)
1
$250,000
$50,000
15
2
$300,000
$70,000
10
3
$125,000
$35,000
5
4
$ 50,000
$12,500
10
5
$250,000
$75,000
5
6
$200,000
$32,000
20
7
$400,000
$125,000
5
Part 3
From your estimates of the WACC in part 1 and the opportunity cost of capital in part 2, what do you estimate the firm’s true MARR to be?
Project
First Cost
Annual Benefit
Life (years)
1
$250,000
$50,000
15
2
$300,000
$70,000
10
3
$125,000
$35,000
5
4
$ 50,000
$12,500
10
5
$250,000
$75,000
5
6
$200,000
$32,000
20
7
$400,000
$125,000
5
Explanation / Answer
part1.
Source amount interest Proportion WACC Short-term 5000000 7.5 0.05 0.375 Long-term 20000000 5.8 0.25 1.45 Retained 25000000 17 0.2 3.4 Common 50000000 22 0.5 11 Wacc 16.23Related Questions
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